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Technology Stocks

Fortive Delivers Solid Margin Expansion in Q4 Despite Cost Inflation and Supply Chain Challenges

Business Strategy and Outlook

Fortive, spun off from Danaher in 2016, has followed in its former parent’s footsteps and adopted the philosophy underpinning the proven Danaher Business System, which has its roots in the Toyota Production System. The Fortive Business System essentially involves acquiring moatworthy companies, expanding operating margins through Lean manufacturing principles, and redeploying cash flows into further mergers and acquisitions. 

Fortive targets companies with reputable brand names, large installed bases, and strong cash flows. Management has focused particularly on boosting recurring revenue in its portfolio, which has already increased from roughly 18% at the time of the spin-off to 38% in 2021, and we think it could reach 50% over the next five years. Driving this trend are acquisitions, divestments and the increasing importance of the firm’s software-as-a-service business. 

Management has pursued acquisitions to bolster its digital capabilities. Fortive seeks to leverage its large installed base and combine connected devices with software to offer customers an integrated package. We expect management’s focus on recurring revenue and digitalization to reinforce Fortive’s moat by increasing customer switching costs and enhancing its intangible assets. 

Under the leadership of CEO James Lico, who brings two decades of experience at Danaher, Fortive has delivered impressive midteens returns on invested capital as a stand-alone company. Given its impressive legacy of prudent capital allocation and driving operational improvement at acquired companies through FBS, Morningstar analysts believe that Fortive has solid prospects to continue compounding cash flows and creating value for shareholders.

Fortive Delivers Solid Margin Expansion in Q4 Despite Cost Inflation and Supply Chain Challenges

Despite ongoing supply-chain constraints, Fortive grew its fourth-quarter core sales 1% from the prior-year period. Fortive’s fourth-quarter core revenue was up 0.8% in intelligent operating solutions, up 2.6% in precision technologies, and down 0.8% in advanced healthcare solutions. Morningstar analysts think that Fortive’s ability to expand its margins despite supply-chain disruptions and cost inflation is a testament to its moat as well as strong execution. Morningstar analysts have increased its fair value estimate for Fortive to $88 from $86, which reflects slightly more optimistic near-term revenue growth and operating margin projections as well as time value of money. 

Financial Strength 

 Fortive is on solid financial footing. As of December 2021, Fortive owed roughly $4 billion in long-term debt and held approximately $0.8 billion in cash and equivalents. Additionally, the company had $2 billion available under its revolving credit facility. Morningstar analysts estimate that Fortive will have a net debt/adjusted EBITDA ratio of around 1.1 times in 2022, and  believe that the company will work toward reducing its leverage in the near term to protect its investment-grade credit rating.

Bulls Say

  • Management has an impressive record of capital allocation and improving operating margins of acquired companies. 
  • Fortive’s digital strategy can help reinforce its moat by combining its large installed base of equipment with complementary software to offer a comprehensive package and enhance customer loyalty.
  • Growth in recurring revenue and SaaS-based offerings, as well as the recent divestment of the automation and specialty unit, has reduced the cyclicality of Fortive’s portfolio.

Company Profile

Fortive is a diversified industrial technology firm with a broad portfolio of mission-critical products and services that include field solutions, product realization, health, and sensing technologies. The company serves a wide range of end markets, including manufacturing, utilities, medical, and electronics. Fortive generated roughly $5.3 billion in revenue and $1.2 billion in adjusted operating income in 2021.

 (Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Dividend Stocks

Snap-on Remains Resilient Despite Supply Headwinds

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Business Strategy and Outlook

Snap-on provides premium tools to vehicle repair shops and industrial customers. Snap-on will continue to be the top player in the tools industry. The company benefits from a strong brand reputation among repair professionals. Customers value Snap-on’s high-quality and strong performing products, in addition to its high-touch mobile van network. Snap-on’s tools and diagnostic products help customers complete repairs faster, improving productivity. Customers will continue to pay up for Snap-on’s tool durability, convenience, and flexible financing options. 

The company’s strategy focuses on providing technicians, shop owners, and dealerships a full line of products, ranging from tools to diagnostic and software solutions. Snap-on’s tools are considered the go-to products, exhibiting better durability and reliability than cheaper alternatives that break a lot quicker. Diagnostic products arm technicians with more information to identify issues faster. Snap-on has exposure to end markets that have attractive tailwinds. In automotive, Demand for vehicle repair work will be strong in the near term, largely due to vehicle owners taking in their cars for overdue servicing (delayed due to the COVID-19 pandemic).

Financial Strength

Snap-on’s remaining segments were resilient, despite the supply headwinds. The repair systems and information segment increased about 9% year on year. A key contributor to sales growth was increased demand for undercar equipment and diagnostic products, which help technicians quickly access repair data, boosting operational efficiency. Snap-on’s exposure to diagnostic products positively, given the proliferation of electronics in automobiles. Snap-on maintains a sound balance sheet. The industrial business does not hold any long-term debt, but the debt balance of the finance arm stood at $1.7 billion in 2021, along with $2.1 billion in finance and contract receivables.

As a lender, the finance arm helps drive sales in the industrial business by providing both customers and franchisees financing. With respect to financing for customers, Snap-on extends credit for large ticket purchases and leaves financing for smaller items to franchisees. Sales representatives bear the credit risk if customers fail to pay. Snap-on’s solid balance sheet gives management the financial flexibility to run a balanced capital allocation strategy going forward that mostly favors organic growth but also returns cash to shareholders via dividends and share repurchases.

Bulls Say’s 

  • The growth in vehicle miles driven increases the wear and tear on vehicles, calling for more maintenance and repair work to keep them on the road, benefiting Snap-on. 
  • Auto manufacturers continue to tap Snap-on to create new tools and products to service new EV models. This alleviates concerns that EV adoption will threaten Snap-on’s viability. 
  • Sales representatives can add new customers on their designated service routes, increasing revenue per franchisee.

Company Profile 

Snap-on is a manufacturer of premium tools and software for repair professionals. Hand tools are sold through franchisee-operated mobile vans that serve auto technicians who purchase tools at their own expense. A unique element of its business model is that franchisees bear significant risk, as they must invest in the mobile van, inventory, and software. At the same time, franchisees extend personal credit directly to technicians on an individual tool basis. Snap-on currently operates three segments—repair systems and information, commercial and industrial, and tools. The company’s finance arm provides financing to franchisees to run their operations, which includes offering loans and leases for mobile vans.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Dividend Stocks

Returning to U.S. Bancorp After Q4 Earnings; Increasing Our FVE to $61 Per Share From $60

Business Strategy and Outlook

U.S. Bancorp is one of the strongest and best-run regional banks we cover. Few domestic competitors can match its operating efficiency, and for the past 15 years the bank has consistently posted returns on equity well above peers and its own cost of equity. U.S. Bancorp’s exposure to moaty nonbank businesses and its consistently excellent core banking operations make us like the company’s positioning for the future. If we were to have a complaint, it would be that the bank was already on top of its game years ago, making it difficult for the firm to further optimize efficiency and returns, while peers seem to be gradually “catching up” over time. 

U.S. Bancorp has an attractive mix of fee-generating businesses, including payments, corporate trust, investment management, and mortgage banking. The payments and trust businesses tend to be highly efficient and scalable due to relatively fixed cost structures. Barriers to entry tend to be high as the initial investment and scale necessary to compete are prohibitive, although competition within payments has heated up in the last several years as software and technology offerings are increasingly important.

Financial Strength

The company’s balance sheet is sound, its capital investment decisions are exemplary, and its capital return strategy is appropriate. U.S. Bancorp is currently above management’s targeted common equity Tier 1 ratio of 8.5%-9%, with a ratio of 10% as of the fourth quarter of 2021, and we view the current goal as appropriate. Bancorp has avoided investing capital in value destroying products, such as GFC era MBS, while simultaneously pursuing value-adding acquisitions and organic growth. Over the last decade plus, U.S. Bancorp has generally maintained its position as the highest returning, most efficient franchise. 

On an EPS basis, wide-moat-rated U.S. Bancorp reported OK fourth-quarter earnings of $1.07 per share, roughly in line with the FactSet consensus of $1.10 and ahead of our estimate of $1.01. However, the trends for the bank’s payment-related fees were not the strongest. The beat was largely attributable to additional reserve releases, which is not a core earnings driver. On the other hand, payment fees, where U.S. Bancorp is more exposed as a percentage of revenue than any other bank we cover, were down across the board sequentially.

Bulls Say’s 

  • Strong fee revenue in moaty businesses, such as payments, helps insulate U.S. Bancorp from a flatter yield curve environment and drive higher returns on equity. 
  • The bank’s upcoming acquisition of MUFG Union Bank should provide additional revenue growth, expense synergies, and value for shareholders. 
  • As payments-related balances and fees come back in 2022, it should provide another earnings growth lever for U.S. Bancorp.

Company Profile 

As a diversified financial-services provider, U.S. Bancorp is one of the nation’s largest regional banks, with branches in well over 20 states, primarily in the Western and Midwestern United States. The bank offers many services, including retail banking, commercial banking, trust and wealth services, credit cards, mortgages, and other payments capabilities.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Technology Stocks

Spirit AeroSystems Reports Improved Fourth Quarter and Is Confident in Pandemic Efficiency Gains

Business Strategy and Outlook

Spirit AeroSystems is the largest independent aerostructures manufacturer. The firm produces fuselages, wing structures, as well as structures that house and connect engines to aircraft. Spirit’s revenue has traditionally been almost entirely connected to the original production of commercial aircraft, but Spirit has a growing defense segment and recently acquired Bombardier’s maintenance, repair, and overhaul business. As commercial aerospace manufacturing is highly consolidated, it is unsurprising that Spirit has customer concentration. Historically, 80% of the company’s sales have been to Boeing and 15% have been to Airbus. Management targets a 40% commercial aerospace, 40% defense, and 20% commercial aftermarket revenue exposure. The firm acquired Fiber Materials, a specialty composite manufacturer focused on defense end markets, and Bombardier’s aftermarket business in 2020 to diversify revenue.

Financial Strength

Spirit AeroSystems has raised and maintained a considerable amount of debt since the grounding of the 737 MAX began in 2019. The company has $1.9 billion of cash on the balance sheet and about $3.9 billion of debt at the end of 2020, and access to another $950 million of debt if it so needs. The firm has $300 million debt coming due in 2021 and 2023, as well as $1.7 billion of debt coming due in 2025, and $700 million of debt coming due in 2028. Revenue of $1.1 billion and adjusted loss per share of $0.84 beat FactSet consensus by 0.1% and missed the same estimates by 29.9%, respectively, though much of the earnings miss was due to a forward loss associated with 787 production. 

Revenue increased 22.1%, primarily due to increased 737 MAX production increasing OE production-related revenue. Although we slightly lowered our long-term outlook for 737 MAX production in the third quarter, we continue to expect that increasing 737 MAX production will be the primary value driver for the firm. Management continues to expect it can generate 16.5% gross margins (including depreciation) at 737 MAX production of 42 per month from efficiencies achieved during the pandemic.

Bulls Say’s 

  • Commercial aerospace manufacturing has a highly visible revenue runway, despite COVID-19, from increasing flights per capita as the emerging market middle class grows wealthier. 
  • Spirit has restructured to become more efficient when aircraft manufacturing recovers. 
  • Spirit is diversifying its customer base, which we anticipate will make it less susceptible to customer specific risk.

Company Profile 

Spirit AeroSystems designs and manufactures aerostructures, particularly fuselages, for commercial and military aircraft. The company was spun out of Boeing in 2005, and the firm is the largest independent supplier of aerostructures. Boeing and Airbus are the firms and its primary customers, Boeing composes roughly 80% of annual revenue and Airbus composes roughly 15% of revenue. The company is highly exposed to Boeing’s 737 program, which generally accounts for about half of the company’s revenue.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Dividend Stocks

Westpac Grinds Through Another Tough Quarter as Margins Continue to Shrink

Business Strategy and Outlook

Westpac Bank Corporation is the second-largest of Australia’s four major banks. The bank provides a range of banking and financial services to retail and business customers, including mortgages, consumer finance, credit cards, business loans, and term deposits. 

Westpac’s strategy is anchored in its commitment to conservatively manage risk across all business areas, following its near-death experience in the early 1990s. The multibrand, customer-focused strategy aims to capture an increasing share of business from its Australian and New Zealand banking and wealth management customer base.The main current influences on earnings growth are modest credit growth, with regulators likely to cool credit demand due to rising house prices and increased household leverage, and delays to business plans for capital expenditure. Intense competition is constraining interest margins with opportunities to lower funding costs largely exhausted. Operating expenses are increasing due to increased provisions for regulatory and compliance project spend.

 Bad and doubtful debt expenses peaked in first-half fiscal 2009 and remained at decade lows until provisions for the coronavirus impact were taken in first-half fiscal 2020. Morningstar analysts expect loan impairment expenses to average under 0.2% of loans over the long term.

Westpac Grinds Through Another Tough Quarter as Margins Continue to Shrink

Westpac’s first-quarter 2022 profit of AUD 1.58 billion was up modestly from the quarterly average of second-half fiscal 2021. A 2% increase in net interest income and 7% fall in operating expenses lifted earnings pre-impairments by around 10%. Unlike last year, the bottom line is no longer being boosted by loan impairment provision releases. Impairments were still modest, and credit quality remains sound, with loans in arrears as a percentage of loans falling 10 basis points to 0.58%.

Loan growth was soft in a strong market, and net interest margins, or NIM, fell to 1.91% in the quarter from 1.98% in the second half of fiscal 2021. The squeeze from chasing loan growth in a competitive environment, an ongoing drag from more fixed-rate loans, plus holding more liquid assets which earn no interest, was a little more severe than Morningstar analyst expected. Morningstar analysts lower  fiscal 2022 NIM forecast to 1.85% from 1.90% previously. The 7% reduction to fiscal 2022 profit forecast is not material enough to move to A$29 fair value estimate. 

Financial Strength 

Westpac comfortably meets APRA’s common equity Tier 1 ratio benchmark of 10.25%. The bank’s common equity Tier 1 ratio was 12.2% as at Dec. 31, 2021. This is based on APRA’s globally conservative methodology and a top-quartile internationally comparable 18%. We see the risk of higher loan losses and credit stress inflating risk-weighted assets as the greatest threat to the bank’s capital position in the near term. In the past three years, the proportion of customer deposits to total funding is about 60% to 65%, reducing exposure to volatile funding markets. Westpac has AUD 8.6 billion in excess capital as at Dec. 31, 2021. Assuming completion of the AUD 3.5 billion share buyback announced in November 2021, this surplus falls to around AUD 5 billion. The bank expects divestments to add roughly AUD 2 billion to this position in fiscal 2022.

Bulls Say

  • Improving economic conditions underpin profit growth from fiscal 2021. Productivity improvements are likely from fiscal 2023. 
  • Cost and capital advantages over regional banks and neo-banks provide a strong platform to drive credit growth. 
  • Consumer banking provides earnings diversity to complement the more volatile returns generated from business and wholesale banking activities. 
  • The withdrawal of personal financial advice by Westpac salaried financial advisors reduces compliance and regulatory risk.

Company Profile

Westpac is Australia’s oldest bank and financial services group, with a significant franchise in Australia and New Zealand in the consumer, small business, corporate, and institutional sectors, in addition to its major presence in wealth management. Westpac is among a handful of banks around the globe currently retaining very high credit ratings. The bank benefits from a large national branch network and significant market share, particularly in home loans and retail deposits.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Dividend Stocks

Vodafone Continues to Make Gradual Progress as Potential Consolidation Comes Into Focus

Business Strategy and Outlook

Vodafone has steadily transformed its business over the past several years, adding fixed-line assets in core markets, selling out of peripheral areas like New Zealand, and forming partnerships in others. Through a series of acquisitions and partnerships, Vodafone has added fixed-line infrastructure to its traditional wireless business in several countries.Vodafone is now the largest cable company in the country, with networks that reach around 60% of the population, enabling it to capture about one third of the broadband market. 

Vodafone has also sought to improve efficiency and free up assets. Intense competition, especially in Spain and Italy, has led to disappointing financial results recently. However, Morningstar analysts think the reshaping of Vodafone’s capabilities across Europe to integrate fixed-line and wireless assets positions the firm to compete more effectively over the long term. Integrating fixed-line and wireless networks should improve the quality of each over time, while bundling services should enable the firm to serve customers more efficiently.

Vodafone Continues to Make Gradual Progress as Potential Consolidation Comes Into Focus

Vodafone’s fiscal third-quarter results were broadly as expected, with management stating that the firm remains on track to hit the upper end of its financial expectations for the year. The firm only reports revenue and customer metrics for odd-numbered quarters. More importantly, management clearly sounded optimistic that it will move forward with transactions that change the structure of its operations in several countries. Rumors have swirled around potential merger partners for Vodafone’s operations in the U.K., Italy, and Spain, each of which continues to face challenging competitive environments. We continue to believe the market has overly discounted the long-term value of Vodafone’s assets, and we suspect moves to improve the economics in certain countries will help uncover that value. Morningstar analysts  don’t plan to change its GBX 185 fair value estimate.

Financial Strength 

As of mid-fiscal 2022, net leverage stood at 3.0 times (before lease obligations), with spectrum costs, restructuring expenses, and dividend payments consuming a large portion of free cash flow while the pandemic and competitive pressure have weighed on EBITDA. Management targets leverage in the range of 2.5-3.0 times EBITDA, though, so debt reduction is not a high priority currently.Even with management claiming comfort with the balance sheet, Vodafone still decided to cut its dividend 40% in May 2019, saving the firm about EUR 1.6 billion annually. The payout in fiscal 2019 consumed more than 90% of free cash flow, after funding spectrum purchases. At the new dividend payout, that ratio dropped to less than 50% of free cash flow during fiscal 2020, though cash payments for spectrum were modest. Sizable spectrum purchases pushed the payout ratio to nearly 80% of free cash flow in fiscal 2021. The firm expects a 60% cash flow payout assuming EUR 1.2 billion of spectrum purchases in the average year.Overall, Morningstar analysts don’t believe Vodafone’s debt load is a concern. The firm holds stakes in multiple assets that could be sold if needed to reduce leverage, including its Australian venture, its partnership with Liberty Global in the Netherlands, and its stake in Vantage Towers. Vodafone has also pledged not to put additional money into its troubled Indian venture.

Bulls Say

  • Vodafone possesses massive scale, serving around 280 million wireless customers globally, and it owns extensive wireless and fixed-line networks in most of the markets it serves. Few telecom firms can match its size and strength. 
  • While Europe forms the core of the business, Vodafone still provides access to several emerging markets with strong growth potential. 
  • Even after the 2019 dividend cut, Vodafone shares still offer a very attractive yield. The current payout should prove sustainable, with room for growth as restructuring efforts wind down.

Company Profile

With about 270 million wireless customers, Vodafone is one of the largest wireless carriers in the world. More recently, the firm has acquired cable operations and gained access to additional fixed-line networks, either building its own or gaining wholesale access. Vodafone is increasingly pushing converged services of wireless and fixed-line telephone services. Europe accounts for about three fourths of reported service revenue, with major operations in Germany (about 30% of total service revenue), the U.K. (13%), Italy (12%), and Spain (10%). Outside of Europe, 65%-owned Vodacom, which serves sub-Saharan Africa, is Vodafone’s largest controlled subsidiary (12% of total service revenue). The firm also owns stakes in operations in India, Australia, and the Netherlands.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Funds Funds

Neuberger Berman International Equity Fund Investor Class

Process:

This strategy’s distinctive approach remains in place under its new leader, earning it an Above Average Process rating. Former lead manager Benjamin Segal said he favoured the mid-cap universe because firms of that size–along with those in the smaller part of the large-cap range–tend to be well-enough established that they can withstand some setbacks but remain less familiar to many global investors and thus often sell at attractive prices. They can also be takeover targets. Former comanager Elias Cohen, who became lead manager upon Segal’s departure on June 30, 2021, follows the same approach. This team wants steadily growing firms, but it also focuses on the quality of company management. The team is willing to own firms without hefty margins if other traits are impressive. The strategy has a 15% limit on emerging-markets exposure, but the portfolio has been far below that for a long time. The turnover rate tends to be moderate. Ideas can come from Cohen, comanager Tom Hogan, or the analysts, and decision-making is collaborative, though the lead manager has final authority for portfolio decisions.

Portfolio:

Portfolio shows that this fund makes fuller use of the market-cap spectrum than most peers and its chosen benchmark, the MSCI EAFE Index. The fund had about 33% of its assets in midcaps and another 4% in small caps (as classified by Morningstar), versus just 10% in mid-caps and almost nothing in small caps for the index and just slightly higher figures for the foreign large-growth and foreign large-blend category averages. The portfolio’s figures are nearly identical to those from one year earlier, showing that new lead manager Elias Cohen has maintained the strategy’s broad market-cap approach even as he traded several stocks into and out of the portfolio. Cohen, like former manager Benjamin Segal, favours the mid-cap and smaller large-cap universes. The portfolio often lies on the border between the growth and blend portions of the style box, but the latest portfolio is fully in the blend region. The strategy continues to spread its assets widely, with none of the 78 stocks receiving more than 2.6% of assets. Emerging-markets exposure remains below 5% and is limited to China and India.

People:

This strategy’s long-tenured lead manager, Benjamin Segal, left Neuberger Berman on June 30, 2021, to become a high school math teacher. Replacing him as lead manager was former comanager Elias Cohen. The firm had earlier promoted Thomas Hogan from the analyst ranks to comanager on Jan. 20, 2021. Cohen had worked with Segal for almost 20 years, most recently as comanager–for two years on this strategy and four years on sibling Neuberger Berman International Select NILIX. The analyst staff remained intact including one addition in March 2021. Three of the six members of the analyst team have been in place since 2008 or earlier. They and the managers also talk with the members of Neuberger Berman’s emerging-markets team. Cohen and Hogan each have more than $1 million invested in this strategy.

Performance:

It’s a bit complicated assessing this fund’s performance, but all in all, the fund has a solid record as a core international equity choice. This fund launched in 2005 and was known until late 2012 as Neuberger Berman International Institutional. But an identical fund that was merged into it in January 2013 posted a strong 10-year record prior to the merger, using the same strategy, under recently departed lead manager Benjamin Segal. Another complication is that although this fund’s growth leanings result in its placement in the foreign large-growth category, it is not very aggressive in that direction, with its portfolio often landing around the border between growth and blend or, as currently, in the blend box. That’s typically been a disadvantage versus growthier rivals for a long time. The managers aim to outperform when markets tumble; although it did not do so in the bear market of early 2020, it did hold up well during the 2014 sell-off and the 2015-16 bear market.

(Source: Morningstar)

Price:

It’s critical to evaluate expenses, as they come directly out of returns. The share class on this report levies a fee that ranks in its Morningstar category’s second-costliest quintile. That’s poor, but based on our assessment of the fund’s People, Process and Parent pillars in the context of these fees, we still think this share class will be able to overcome its high fees and deliver positive alpha relative to the category benchmark index, explaining its Morningstar Analyst Rating of Bronze.

Top Portfolio Holdings:  
Asset Allocation:  

 


(Source: Morningstar)                                                                     (Source: Morningstar)

About Funds:

A growing conviction in the duo that manages JPMorgan U.S. Large Cap Core Plus and its Luxembourg resided sibling JPM U.S. Select Equity Plus, and the considerable resources they have effectively utilised, lead to an upgrade of the strategy’s People Pillar rating to Above Average from Average. The strategy looks sensible and is designed to fully exploit the analyst recommendations by taking long positions in top-ranked companies while shorting stocks disliked by the analysts. Classic fundamental bottom-up research should give the fund an informational advantage. The portfolio is quite diversified, holding 250-350 stocks in total with modest deviations from the category index in the long leg. The 30/30 extension is broadly sector-, style-, and beta-neutral. Here the managers are cognizant of the risks of shorting stocks, where they select stocks on company-specific grounds or as part of a secular theme. For example, the team prefers semiconductors, digital advertising, and e-commerce offset by shorts in legacy hardware, media, and network providers. Short exposure generally stands at 20%-30%, with the portfolio’s net exposure to the market kept at 100%. The strategy’s performance since inception, which still has some relevance given Bao’s involvement, has been outstanding.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Dividend Stocks

Constructive Regulatory Outcome in Missouri Would Be Big Boost for Evergy

Business Strategy and Outlook

Evergy must secure constructive regulatory outcomes in Missouri and Kansas to support growth plans that include $10.4 billion of capital investment during the next five years, primarily to replace aging coal plants with renewable energy. New legislation in Missouri should allow Evergy to securitize the remaining book value of coal plants as they retire in the coming years, improving cash flow and reducing equity needs.

Kansas, which represents about half of Evergy’s total asset base, has a more constructive regulatory environment than Missouri, and Kansas regulators have supported renewable energy investment for many years. Evergy also benefits from favorable federal regulation for its electric transmission assets, which could top 15% of its asset base in the coming years. Evergy is one of the few utilities that does not have any investments outside its rate-regulated businesses. Management said it remains committed to directing all of Evergy’s investment to its regulated utilities at least through 2025. Senior leadership has extensive experience at companies with unregulated power businesses, and we wouldn’t be surprised if Evergy directs some capital investment outside of the utilities, perhaps with a partner. 

Evergy raised the dividend 6% during the two years following the merger and raised it 7% for 2022 to $2.29 per share annualized. Morningstar analyst expect the dividend to grow in line with earnings for the foreseeable future

Constructive Regulatory Outcome in Missouri Would Be Big Boost for Evergy

Morningstar analyst are reaffirming to $60 fair value estimate for Evergy after reviewing the company’s two Missouri customer rate filings and incorporating them into their  forecast. 

Morningstar analyst expect regulators to approve rate increases less than Evergy’s $43.9 million request in its Missouri Metro jurisdiction and $27.7 million request in its Missouri West jurisdiction. However, Morningstar analyst think these are reasonable requests and expect constructive outcomes that support  6% average annual earnings growth rate through 2024. If regulators were to approve the full rate increase, it would raise Morningstar analyst growth rate to 7%, the middle of management’s 6%-8% target.

Financial Strength 

Evergy had an equity-heavy balance sheet following the all-stock combination of Westar and Great Plains. However, the company has repurchased over 45 million shares following the merger for about $2.6 billion. Morningstar analyst don’t expect any additional share repurchases due to an acceleration of the company’s investment plan. Morningstar analyst expect debt/total capital to remain in the mid-50s. Following the merger, the board raised the dividend 6.3% in late 2019, 5.9% in late 2020, and 7% in late 2021. Management has targeted a payout ratio of 60%-70% of operating earnings, in line with most other regulated utilities. Morningstar analyst forecast 6% dividend increases for at least the next four years, in line with earnings growth.

Bulls Say

  • Morningstar analyst expect annual dividend increases to average 6% over the next four years. 
  • A material net operating loss position is likely to shield Evergy from paying significant cash taxes until 2023. 
  • Recent legislation has improved the regulatory framework in Missouri, home to one third of Evergy’s rate base. This should reduce regulatory lag

Company Profile

Evergy is a regulated electric utility serving eastern Kansas and western Missouri. Major operating subsidiaries include Evergy Metro, Evergy Kansas Central, Evergy Missouri West, and Evergy Transmission Co. The utility has a combined rate base of approximately $15 billion, about half in Kansas and the rest split between Missouri and federal jurisdiction. Evergy is one of the largest wind energy suppliers in the U.S.

 (Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Global stocks Shares

Sensata To Use Bolt-on M&A To Supplement Sensor Content Growth In Its Core Markets

Business Strategy and Outlook

It is understood Sensata Technologies is a differentiated supplier of sensors and electrical protection. The firm has oriented itself to benefit from secular trends toward electrification, efficiency, and connectivity, and it is supposed that investors will see meaningful topand bottom-line growth as upon an automotive market recovery. 

Despite the cyclical nature of the automotive and heavy vehicle markets, electric vehicles (EVs) and stricter emissions regulations provide Sensata the opportunity to sell into new sockets, which has allowed the firm to outpace underlying vehicle production growth by about 4% historically. It is alleged such outperformance is achievable over the next 10 years, given the expectations for a fleet mix shift toward EVs and Sensata’s growing addressable content in higher-voltage vehicles. 

It is observed, Sensata’s ability to grow its dollar content in vehicles demonstrates intangible assets in sensor design, as it works closely with OEMs and Tier 1 suppliers to build its products into new sockets. It is also believed the mission-critical nature of the systems into which Sensata sells gives rise to switching costs at customers, leading to an average relationship length of 31 years with its top 10 customers. As a result of switching costs and intangible assets, it is held Sensata benefits from a narrow economic moat and will earn excess returns on invested capital for the next 10 years. 

Over the next decade, it is anticipated Sensata to use bolt-on M&A to supplement sensor content growth in its core markets. Sensata established a leading share in the tire pressure monitoring system (TPMS) market in 2014 with its acquisition of Schrader, and it is implicit acquisitions will play a key role in allowing the firm to enter new, higher-growth, adjacent markets. Recent acquisitions of GIGAVAC and Xirgo will allow Sensata to compete in the electric vehicle charging infrastructure and telematics markets, respectively, which is likely to begin to bolster the top line and margins near the end of analyst’s explicit forecast and beyond.

Financial Strength

Sensata Technologies is leveraged, but it is held that its balance sheet is in good shape, and that it generates enough cash flow to fulfill all of its obligations comfortably. As of Dec. 31, 2021, the firm carried $4.2 billion in total debt and $1.7 billion cash and equivalents. Sensata closed out 2021 with a net leverage ratio of 2.8 times, which is squarely in management’s target range of 2.5-3.5 times. Over the next few years, it is probable Sensata to stay in its target leverage range as it continues to engage in supplemental M&A. Between 2023 and 2026, Sensata has $2.1 billion total in debt maturing, with $400 million-$700 million coming due each year. It is projected the firm to easily fulfill its obligations with its cash balance and cash flow—it is foreseen over $700 million in average annual free cash flow over Analyst’s explicit forecast. Finally, it is noted that Sensata has a variable cost structure that allows it to keep a relatively healthy balance sheet during difficult demand environments. Even with weak end markets in 2019 and 2020 that shrunk the top line, Sensata’s free cash flow generation held steady, with its free cash flow conversion jumping to 130% in 2020.

Bulls Say’s

  • Sensata should benefit from secular trends toward electrification, efficiency, and connectivity to continue outgrowing global vehicle production. 
  • Fleet management is an opportunity for Sensata to expand its margins and create a recurring base of revenue in an emerging, high-growth market. 
  • Sensata has some of the sensor industry’s highest margins and strong free cash flow conversion, providing it with capital to invest in organic and inorganic growth.

Company Profile 

Sensata Technologies is a leading supplier of sensors for transportation and industrial applications. Sensata sells a bevy of pressure, temperature, force, and position sensors into the automotive, heavy vehicle, industrial, heating, ventilation, and cooling (HVAC), and aerospace markets. The majority of the firm’s revenue comes from the automotive market, where it holds the largest market share for tire pressure monitoring systems. 

(Source: MorningStar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Global stocks

Cushman And Wakefield PLC To Post Healthy Growth Rates

price of btc is going to breakout

Business Strategy and Outlook

Cushman & Wakefield underwent a major business transformation after the combination of DTZ, Cassidy Turley and Cushman & Wakefield in 2015. The combination of these three firms expanded its geographical presence, added incremental capabilities, and gave the company adequate scale to effectively compete with its larger rivals CBRE and JLL for lucrative global contracts from multinational clients. The company has benefitted from the secular trends in the real estate services industry and has been able to grow strongly through organic growth opportunities, strategic in-fill acquisitions and by actively recruiting fee earning teams. M&A is a strategic pillar for the company in its quest to become a single source provider for the full spectrum of real estate related services on a global footprint and the company has demonstrated a track record of successful integrations and broker onboarding. 

The GAAP operating margin of the company has been negatively impacted by restructuring & integration related charges, and various efficiency related projects over the past several years. However, it is alleged that these investments were necessary for the firm and the enhanced scale and efficiency improvements from the prior initiatives will contribute positively toward margin accretion on a midcycle basis in the upcoming years. It is also anticipated non-recurring changes to normalize, resulting in positive earnings and cash flow generation that can be reinvested into the business. 

The leasing and capital market segments which make up about 38% of fee revenue provides full-service brokerage and has a higher cyclicality in revenue. By contrast, the property & facility management segment, which make up about 54% of fee revenue, represents the outsourcing business and provides a contractual stream of revenue. The valuation & other segment contributes 8% of fee revenue and provides solutions related to workplace strategy, digitization, valuation and so on. The company should be able to post healthy growth rates as it continues to take share from its smaller competitors and benefits from rising capital flows into real estate, increasing corporate outsourcing and growth in urbanization.

Financial Strength

Cushman & Wakefield has somewhat concerned financial health. The company had a total debt of $3.2 billion and net debt of $2.0 billion as of the end of third quarter in 2021. This resulted in a net debt/adjusted EBITDA ratio of about 2.8 times. Management has repeatedly stated that debt reduction is not a strategic priority, and they are comfortable with a debt/adjusted EBITDA ratio in mid 2s. Debt maturity timeline is not an issue for the company as most of the debt matures after 2024. The company is also in a comfortable position with respect to liquidity with a total liquidity of $2.2 billion consisting of cash and a revolving credit facility. This gives the firm enough flexibility to fund its operations, pursue M&A and invest in organic growth opportunities. The company has used leverage for in-fill acquisitions in the past to achieve adequate scale and capabilities to compete with its larger rivals. The company is currently using approximately 40% debt to fund its capital structure, which makes it significantly more leveraged than its larger competitors CBRE and JLL, which are currently using approximately 5.0% debt. Additionally, it has not been able to consistently generate positive operating cash flows since 2015 because of the significant investments in integration and efficiency related projects. This makes the company vulnerable to macroeconomic downturns and the cyclicality in the commercial real estate. It is likely the cash flow generation capacity of the business to improve in the upcoming years as it achieves scale and the nonrecurring expenses normalize. Although it isn’t viewed, the company’s high level of debt as an immediate liquidity concern, a prolonged downturn could call its underlying financial stability into question. While it is anticipated the firm to benefit from various secular tailwinds, it is alleged that management should err on the side of caution and refrain from taking too much incremental debt, given the cyclical nature of the industry.

Bulls Say’s

  • As one of the largest of only a few truly international one-stop shops, Cushman & Wakefield is poised to continue taking share from competitors in a growing industry that increasingly rewards scale. 
  • The trend of corporate outsourcing represents a significant opportunity and area of growth for Cushman & Wakefield. 
  • Increased scale and the recent efficiency initiatives should help the company achieve material margin accretion in the upcoming years.

Company Profile 

Cushman & Wakefield is the third largest commercial real estate services firm in the world with a global headquarters in Chicago. The firm provides various real estate-related services to owners, occupiers and investors. These include brokerage services for leasing and capital markets sales, as well as advisory services such valuation, project management, and facilities management. 

(Source: MorningStar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.